The Stock Market Since 1925

I just got the latest edition of the Ibbotson SBBI Yearbook. This is a well-known resource for investors which covers the long-term data on stocks, bonds, bills and inflation. Over the next few days, I’ll post some of the charts from the updated yearbook.

I’m always a bit leery of studies of long-term market returns, especially when the study goes into the 19th century. The idea of a stock market that the average consumer can participate in is a relatively recent phenomenon.

Here’s a chart of the stock market’s return since 1825. The red line is capital gains, the blue is dividends and the black is both together. After 188 years, one dollar turned into more than $4.2 million; annualized, that comes to 8.45%. Of that, 5.02% is from dividends and 3.27% is from capital gains.

image1318

Before the bull market of the 1920s, the stock market was almost entirely one of dividends. You’d buy a stock near its par value (usually $100) and wait for the board of directors to declare the dividend each year—and that was the stock market.

Think of it this way: during the last third of the 19th century, inflation fell by about 2% per year on average. If you were getting a stock that paid 5% per year in dividends and had zero capital appreciation, you were basically matching long-term real returns. That idea is very foreign to modern investors, but that’s how things worked back then. The idea of steadily rising capital gains is not a constant.

The phrase “this time is different” is often mocked but the bull market of the 1920s really did permanently change the market from one that focused on dividends to one that focused on capital gains.

Another concern I have is that using this long-term data creates overly optimistic expectations. I doubt that the extraordinary success of the United States over the past 180 years is easily repeatable. Even in the more recent past, I think the era of post-World War II prosperity was a one-off deal.

Posted by on April 1st, 2013 at 1:37 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.